The Greatest Wealth Transfer in History
The hard facts:
Many people want their children to have a better life than they did. And they are willing to try to make that happen.
According to AARP, people older than 50 hold 80 percent of America’s household wealth, the non-organizational wealth.
That amount is estimated to be between $30 and $50 trillion dollars.
According to a study by U.S. Trust, there are now over 2 million U.S. households with assets of $3 million or more. There are almost 319,000 households with more than $10 million or more. Many face the question of passing on that wealth to their children so as to help and not destroy their futures.
The well-publicized crashes of many lottery winners as well as the abuses of inherited wealth demonstrated through such as Paris Hilton and the Kardashians have made the risks of sudden great wealth evident to all.
Over the next 20 to 30 years most of holders of that wealth will pass away.
K. C. Ma, director of the George Investments Institute at Stetson University in DeLand, Florida has been quoted saying:
“More than 75 million millennials born between 1981 and 1997 are ready to take over estimated $30 trillion in wealth from baby boomers.”
If anything, Dr. Ma may be understating the total wealth transfer that is going to happen in the next 30 years because the wealth estimation fluctuates with the economy. Equities and property values are currently significantly higher now than when Dr. Ma wrote his article.
A common concern expressed by the wealthy is that if they leave too much money to their children they may do harm and not good. That is a legitimate concern. Are the Millennials ready? The typical stereotypes of Millennials are that they are the trophy generation, suffering from entitlement, pampered, self-absorbed, and narcissistic. Are those stereotypes accurate? As usual, stereotypical descriptions are worst-case generalizations and as with most generalizations they do not represent nearly all of the maligned group. Certainly, it is true of some, but just as certainly it is completely untrue of many. But generalizations may have some value.
Some of the reasons Millennials are different in their reaction to Boomers and suspicious of what they hear is from the harsh reality of a generation inheriting not only great wealth but also inheriting a national debt of over 19 trillion dollars overall and many Millennials individually are burdened by personal debt including student loans.
Start with student loan debt. When the youngest Millennials started graduating from college, the average student load debt was $37,172. Approximately 42 percent of Millennials start their employment with student loan debt. Most of those admit that their loans have an impact on their ability to meet their personal financial goals.
Millennials have also made their debt and their dilemma worse. As a whole, they aren’t saving money. Overall, Millennials are saving at a negative 2% per year. They are either spending their limited savings or going into even greater debt, and often that is high interest credit card debt.
So, ask the question again. As a whole and as a generation, are Millennials ready for $30 trillion? Decidedly, the answer is “No.” This huge amount being transferred in such a short period of time is unprecedented in this country’s history. Can they get prepared? Of course, the answer is “yes.” There are many options both for the Boomers as they are considering this wealth transfer and how much of it passes to their heirs, and for the Millennials as they try to figure out how to manage wealth for which they are largely unprepared. The other question that must be asked though, is whether the transfer is the best and wisest choice for the transfer of such wealth.
Let’s look at these questions from both perspectives.
From the Millennial perspective
As a whole, Millennials have a lot to learn before handling significant wealth. There are both pluses and minuses in what needs to be learned and what stands in the way.
On their own, younger adults rarely handle large sums of money well; a fact that crosses generational lines. More Boomers had to work hard and long to accumulate wealth and in the process they learned to handle that wealth at least somewhat responsibly. Few who were handed wealth suddenly in their youth have done as well, regardless of their generation. Handling significant wealth requires more maturity than some will ever have, but certainly more than the very young normally have. Neuroscience has established that the areas of the human brain where good judgment is formed continue developing into the 20’s, and later for males than females. Regardless, science cannot yet measure when the good judgment to handle millions of dollars of wealth will develop in either males or females. Generalities and vague estimates are the best modern science can do at this time, but experience shows that good judgment takes time to develop.
There are some differences between the generations that, while not universal, are broad enough to appear to be significant. As a whole, the Millennials do not trust financial advisers and object to the fees charged for active financial management. They are also skeptical of the markets which they saw hurt their parent’s investments in the 2008 “Great Recession” and which has, over their lifetimes, been quite volatile. Their history includes the lessons of Enron and Lehman Brothers, Bernie Madoff and many more from the crisis of greed. Even Millennials who have become financial advisers are critical of their trade and its practices, which are described as outmoded. As put by one author, Jessica Lynn Rabe, “we [Millennials] want a Tesla, and most of you [financial advisers] are trying to sell us Pontiacs. As a result, Millennials call for many changes. For more insight on this thought, see the following article, written by a Millennial who is a financial adviser: http://www.investmentnews.com/article/20150413/BLOG09/150419987/millennials-to-financial-advisers-doingitwrong. She makes a strong point.
Millennials were raised with technology and prefer technology to people in many situations, one of which is financial management. They learned investment with exchange-traded funds (ETFs), funds widely held by Millennials and largely not understood by enough Boomers. Technology is adopted and widely used by Millennials far easier and quicker than by Boomers. Over a typical 30-day period, 49 % of Millennials used a smart phone or laptop to pay a bill and 46 % transferred funds between bank accounts. Needless to say, that is a far higher percentage than for Boomers.
As with their life on the go, they want their financial management and advice to be on the go, with mobile technology, and with immediate access. Robo-advisors started in 2008 as a means to re-balance assets in funds. Rapid improvement in the technology has allowed robo-advisors to provide fast, reliable, 24×7 access even to small investors with either no fee or a fee significantly lower than normal for actively monitored investment accounts. There are now many competing robo-advisors, including Betterment, Wealthfront, Kapitall Brokerage, Personal Capital, Bloom, Acorns, SigFig, and WiseBanyan. Financial management firms have also gotten into the field and are rolling out robo-advisors of their own. Most have a fee, even if less than the traditional fee for active management.
Robo-advisers are far from perfect. Experience tells us that one size truly does not fit all. They do provide an entry point for first-time investors, but they are also lacking in full service capacity and cannot help clients who need services like tax management, trust fund administration, retirement planning and they cannot address even the simple questions an unsophisticated investor does not know how to ask well, especially where personal, family or health factors add human nuances and emotional angles to both the questions and their answers.
From the Boomer perspective
Boomers still view Millennials with doubt. And they view the market with less skepticism than the younger generation, perhaps because they have seen long periods of market growth and stability from the 1980’s and 1990’s that have not been seen by the Millennials. It is that generational doubt combined with the scientific uncertainty of mature judgment in young adults that causes many Boomers to challenge the thought of a mass transfer of enormous wealth to a generation that may not be ready for it.
Perhaps some of the concerns also arise because Boomers have not handled their wealth to solve the many problems of the U.S. much less the world. The Office of Economic Cooperation and Development reports that the richest 10 percent of American households earns about 28 percent of American income. To compound the problem, the wealthiest 10 percent of U.S. households have hold 76 percent of all the wealth in America. The bottom 40% own essentially nothing. The Boomers did nothing to improve wealth disparity; if anything, they exemplified the poetic concept of “Get all you can and can all you get, sit on the lid and poison the rest.”
From the Boomers’ perspective, their concerns about the Millennials can perhaps be summed up with a few questions: “How much can the Millennials handle well?” or, phrased differently, “How much is good for them?” and “What is the best alternative to unloading excessive and unsafe wealth on my family?” Those questions are subjective, but need to be addressed and the first two can best be addressed as one.
How much can the Millennials handle well? Or How much is good for them?
This will end up being a very subjective answer that necessarily will be different for every child. Many wealthy seniors do not want to harm their children’s and grandchildren’s growth and development by giving them too much too quickly.
Warren Buffett once said that he wanted his children to have enough money to feel as though they could do anything they wanted “but not so much that they could do nothing.” Buffett, and many who had to work hard for their wealth, believe strongly that good stewardship is essential and must be taught. One curse of the sudden inheritance of substantial wealth is an illusion, but one that could destroy career and work plans or even a life; that is the illusion that you don’t have to do anything much, you have enough to have fun and get by. Too much too soon can eliminate incentive. Yes, it can reduce pressure and stress, but diamonds are produced from plain lumps of coal by pressure. No pressure, no diamond.
Think back to your own maturity level at the age of 20 to 25. What would have happened to you if you had just been given substantial wealth such as home worth $750,000 or $500,000 in cash? The call of travel and some easy times is a strong temptation, one that could delay or derail a professional career.
There are a variety of ways to teach good stewardship, but it should have begun far back in early childhood. For ideas, see Are Your Kids Involved In Your Giving?, Expanding Your Circle of Giving, Are You Giving Your Kids Money to Burn? and Teaching Stewardship to Your Children.
But whether those lessons were or were not taught, starting communication now is essential. Boomers can help prepare their children and grandchildren by starting conversation on the “whats” and “whys” now. Share the essential information (see Essential Documents – End of Life Checklist in Resources for You/Legal Documents) and also share values, their faith facts about their life, relationships, and family history.
In the sense of passing along wealth, the greatest earthly wealth is not the money but the wisdom of life. Solomon knew that when he wrote to his sons in Proverbs 10. In his restless and hormonal youth, Solomon wrote the Song of Solomon about love and passion, as he matured he wrote Proverbs, passing along some of the wisdom life and God had taught him, and in his later years he wrote Ecclesiastes, showing the many disappointments of his long life. He wrote to try and save those who followed him the same futility of trying to find satisfaction and joy in money, possessions, accomplishments, etc.
Ecclesiastes 2:10-11
10 I denied myself nothing my eyes desired;
I refused my heart no pleasure.
My heart took delight in all my labor,
and this was the reward for all my toil.
11 Yet when I surveyed all that my hands had done
and what I had toiled to achieve,
everything was meaningless, a chasing after the wind;
nothing was gained under the sun.
In the strict sense of passing on wealth, there are alternatives, and which fits best will be very subjective. No two families are the same; what would be an adequate help for one will be excessive for another and yet inadequate for yet another. One size does not fit all.
Some of the problems seen in having too much too soon include:
Demotivation. Children and young adults who get too much too soon have no reason to work hard and earn anything, they already have all they want. In the years when good work habits, good business practices and good judgment should be developed and honed, a lack of reason to develop and mature can result in lost opportunities for growth and maturation. The trust fund babies of multiple movie stars and wealthy business persons are the best well-publicized examples.
Over-focused on money. It is called “growing up” for a reason. We start immature and through what we learn as we mature, we become adults (hopefully). What we become as adults and what matters to us as adults is developed as we mature. If money is what matters as we grow up, then money will remain a priority. The development of social skills, caring and empathy can fall by the wayside.
Ingratitude. If you think you got it because you deserved it, you lose all sense of gratitude. That can be true at any age, but the young are most susceptible to being deceived into thinking that social status is earned or deserved. We need a genuine understanding that we own nothing, it all belongs to our Creator. Psalm 24:1-2. Even what we have accomplished “ourselves,” has been accomplished with the skills and tools God has given us. Deuteronomy 8:18.
As a result, many want to limit what their family gets – for their own good! There are multiple approaches to accomplish just that.
Some may want to set an inheritance limit for their children. Such a limit could range from a few thousand dollars for those without wealth to $1 or $2 million on the low end to $10 million on the upper end for those with substantial wealth. That approach, however, does not answer the question, “How much is too much?”
Others do not put an upper limit on their children’s inheritance, but instead structure the passage of wealth to promote their own legacy visions. That also fails to address the concern raised by “How much is too much?”
Some establish trust funds that distribute assets to their children on a schedule. A common structure, regardless of whether it is thousands or millions, is for sums to be available for education and medical needs throughout the trust period, but otherwise for the trust to pass in increments, perhaps one third at age 25, the next third at age 30 and the final amount at age 35. That may or may not address the question of “How much is too much?”
Some forego an age-based distribution schedule in favor of what is often referred to as an inheritance trust. Such a trust can span generations through a trustee who is allowed to provide for the family and descendants based upon specific terms and conditions. This approach leaves the answer to the question “How much is too much?” to the trustee.
One such inheritance trust is called an incentive trust. The beneficiary in an incentive trust is given certain goals or targets in order to receive trust distributions. Essentially, an incentive trust is one that encourages or discourages behaviors and goals. However, one negative aspect to incentive trusts is the difficulty in setting the goals well. If the goal is financial, such as an income goal, the child with the most income gets the inheritance while the child who becomes a Pastor, teacher or missionary may lose out. Hard and fast rules often seem (and are) arbitrary and unfair when the unexpected but inevitable turns and twists of life occur.
But those still leave the questions, “How much is enough?” and “How much is the right amount?” Ultimately the answer is a guess and is very personal. There is a lot of merit to the Warren Buffet approach. You should give your children enough that they do something good, but not so much that they do nothing. One reasonable formula is that you should avoid changing your children’s lifestyles. If they are hourly wage earners in an honest and honorable job, allow them enough to help and not interfere. If they are professionals, be thankful, and give them enough to help their profession but not so much that incentive and stress are entirely eliminated. If they are having a hard time, don’t remove all of the tension and destroy character-building hard work. Let them live at the economic level they earned. You want to give a hand up, but never a hand out! Money can be a comfort if it acts as a safety net but it should never be an all-encompassing cushion to protect against the struggles of life. The odds are that you grew the most under stress, most do. The odds are that you are better off due to having stress in your life.
Whatever the means for passage of wealth is the result, there remains yet another question. This third question and the answer that flows from it and from what has been written above is, “What is the best alternative to unloading excessive and unsafe wealth on my family?”
What is the best alternative to unloading excessive and unsafe wealth on my family?
Do not ignore the harsh reality that far less money than great riches can have very negative, even corrupting, results. Money is addictive, a true tempter, and solidly the root of all kinds of evil. 1 Timothy 6:10. How much is enough for a money addict? – just a little bit more. The result of sudden money can be a life ruined.
If you are uncertain, you have opportunities that may arise from that uncertainty. Giving funds, more technically called Donor Advised Funds, such as those which can be set up through The Idlewild Foundation and The National Christian Foundation (NCF) present unique opportunities here.
A Donor Advised Fund (DAF) can be easily established and funded. At the time of funding the DAF, the money is considered donated to a charity and is tax-deductible. The money is placed into a fund with NCF and the funds may be given out in grants to worthy charities. The DAF can be distributed by you or you may chose to set up a DAF for each child or grandchild and they may make the grants to charities they chose, learning the joy of giving. Acts 20:35.
For more on Donor Advised Funds, see What is a Giving Fund?
Allow your growing children to work, earn money, save money, make purchases, save toward goals such as major purchases, learn generosity and learn financial responsibility. As they grow older, if you own a business, let them work their way up the chain of command to become (by earning that right) co-directors of your business. The business itself may be donated to charity with certain legal structures that family management remains. See the story of the Alan and Katherine Barnhart. It is more blessed to give than to receive, Acts 20:35.
About the author:
John Campbell has retired from a 40-year legal practice as a trial attorney in Tampa. He has served in multiple volunteer roles at Idlewild Baptist Church in Lutz, Florida, where he met Jesus. He began serving as the Executive Director of the Idlewild Foundation in 2016. He has been married to the love of his life, Mona Puckett Campbell, since 1972.